What the Fed Move Means

  Talk about a shot in the arm. The Federal Reserve's Sept. 13 announcement of a third round   of "quantitative easing" sent some mortgage-bond funds to their biggest one-day gains in a year.

The Fed said it would buy mortgage-backed securities, or MBS, for an indefinite period to bolster the economy. That could spell an opportunity for investors—and might warrant stocking up on funds that hold the securities, say analysts.

While "QE3" was anticipated, the particulars of the program were something new. Instead of committing to buy a fixed amount of Treasury debt—as it did when announcing QE2 in November 2010—the Fed left this round of easing open-ended.

The Fed says it plans each month to buy $40 billion of agency mortgage-backed securities, which are supported by government-sponsored enterprises such as Fannie Mae and Freddie Mac . The Fed says the buying will continue until the labor market improves substantially.

But because it is unclear how long the Fed will continue its bond-purchasing program, most segments of the mortgage market seem to have priced in only about a year's worth of Fed purchases, says Steven Abrahams, head of MBS and securitization research at Deutsche Bank.

The mortgage market also will be hypersensitive to changes in the labor market, says Mr. Abrahams. When unemployment claims or payrolls reports are unexpectedly weak, traders will expect the Fed's bond-buying program to continue longer, which will push mortgage bond prices up, he says. Prices could fall after strong reports. (Bond yields move in the opposite direction of prices.)